Dr Paul Simmonds of Warwick Business School comments:
Life has been challenging for several months for Royal Mail with serious COVID-related problems, especially over Christmas, affecting the reliability of deliveries. In fairness, operating efficiently is difficult and costly when around 15,000 employees are absent due to COVID necessitating £340m of overtime and temporary staff costs. Customers have been vocal in their criticism of Royal Mail and its failure to meet its Universal Service Obligation has raised the prospect of fines from Ofcom.
Even before privatisation in 2013, Royal Mail has had a rolling programme of modernisation which has yielded significant operational benefits although sometimes not as high as hoped.
It has long been tailoring its operations to reflect the continuing and accelerating decline in letter volumes and significant increase in parcels volumes which were boosted further by shopping at home during the pandemic although volumes fell 2.4% in the three months to 31st December reflecting lower Black Friday activity.
Today's announcement is part of this ongoing programme. The restructuring, which will see 700 managerial job lost and is being discussed with the unions, will cost around £70m and yield ongoing annual savings of £40m. It is the first significant move from CEO Simon Thompson who was appointed in mid-2021. The announcement has been welcomed and by mid-morning the share price had risen 5% to 457p although that is significantly below its 12month peak of 606p in June 2021.
Today's announcement is unlikely to be the last time jobs are lost at Royal Mail. Parcels growth will not continue at the pace seen over the last couple of COVID-effected years and may even decline as consumers return to the high street.
That will mean competition amongst parcel delivery companies will intensify squeezing both volumes and margins so further streamlining will be necessary to maintain profitability. And, as always, Royal Mail will have to continue to try to find some way to negotiate changes to the costly Universal Service Obligation, a problem not faced by any of its competitors.